Zizig Company Limited $($ZCL$)$ is a listed company involved in agriculture. Its current land

and processing plant are too small to meet the growing demand that it anticipates to

have once it gets a permit for the construction of a new dam. It therefore seeks to

expand its operations and is wary of a discount rate it can use as a hurdle rate in its

decision making. To estimate this rate, they have been advised to consider estimating

the weighted average cost of capital as a basis for identifying this hurdle rate. The

following information is available. The current capital structure is shown below:

Debt, $9\%$ coupon, K$1,000$ par K$20,000,000$

Preferred stock, $8\%$ dividend, K$50$ K$10,000,000$

Common stock, K$1$ par K$2,000,000$

Retained earnings K$68,000,000$

TOTAL K$100,000,000$

New K$1,000$ par bonds can be sold at par with a $10\%$ coupon. New K$25$ par Preferred

stock may be sold at par with a k$2\mathrm{.}50$ dividend per share. Dividends on the common

stock have grown at a rate of $8\%$ which is expected to continue. Next year$$s dividend is

expected to be K$2\mathrm{.}00$ per share and the company$$s common stock whose beta

coefficient is $1\mathrm{.}5,$ currently sells over$-$the $$counter at K$20\mathrm{.}00$ per share. The risk free

rate is $6\%$ and the return on the market portfolio is $15\%.$ The company is in the $35\%$ tax

bracket.

Required:

$($i$)$ Calculate the cost of debt for ZCL$.$

$(3$ marks$)$

$($ii$)$ Calculate the company$$s cost of preferred stock.

$(3$ marks$)$

$($iii$)$ Calculate the cost of equity using both the dividend growth model and the security

market line.

$(8$ marks$)$

$($iv$)$What is the firm$$s weighted average cost of capital?

$(4$ marks$)$

$($v$)$ Explain why many companies use their weighted average cost of capital $($WACC$)$ to

evaluate capital investments, and what particular assumptions they make in using

WACC for this purpose.